Federal Reserve Bank of Dallas President Robert Kaplan spoke with Bloomberg Television’s Betty Liu, Mark Barton, and Michael McKee today. He discussed his expectations for a consumer rebound, his support of a rate hike if GDP and jobs data come together, and how the U.K. Brexit debate will factor into the Fed’s next interest rate decision.

On how much Brexit will influence the Fed, Kaplan said: “It’ll be a factor…Our meeting is the 15th and 8 days later is the vote. I’m going to have to make an assessment on June 15 what the likelihood is, and right now, it’s a little bit unclear — or it’s unclear. Forget a little bit, it’s unclear. And if it’s still unclear on June 15, that’s going to be a factor.”

When asked whether the British vote to leave the EU, he said: “My own sense is, it’s still more likely than not that it isn’t going to happen but we’ll have to see….There is a whole range of impacts if it did happen, including, not the least of which on the U.K. currency, and ripple effects that might have to other countries, impact on flight to quality and other issues that will create some instability. So, it will be a factor and if it did happen, we’re going to have to take some time to digest it.”
On whether slow grown means the Fed should take more time before raising interest rates, Kaplan said: “The job market has been strong, so right now, I’d put it differently. We need to reconcile GDP data with job data….Either the job data is going to get weaker, or, more likely, GDP is going to get stronger. I’m expecting the latter. And I think that if that happens, I personally will be moving toward advocating some removal of accommodations sooner rather than later. ”

MARK BARTON: I want to introduce a very special guest today — Dallas Federal Reserve president, Robert Kaplan, who joins us from London exclusively today. Mr. Kaplan, thank you very much for taking time out to join us.

BARTON: The big piece of data this week was the U.S. GDP. We have the worst quarterly performance, as you know, in two years. The statisticians can’t blame the weather this time. We have seen a bounce back after the first quarters in 2014, 2015 — what sort of a risk is there that we won’t see a similar bounce back this time?

KAPLAN: Well, there is certainly a risk on the positive side — the consumer is getting stronger. While they might not have spent in the first quarter, their capacity to spend should be improving. Their balance sheets are improving, jobs market’s strong, so we’re hopeful that you’ll see a rebound but I’d like to see the rebound. It’s what I’m expecting in the second quarter.

BARTON: Does the slow growth mean the Federal Reserve should take a little bit more time before it raises interest rates again?

KAPLAN: The job market has been strong, so right now, I’d put it differently. We need to reconcile GDP data with job data. That’s going to happen one of two ways. Either the job data is going to get weaker, or, more likely, GDP is going to get stronger. I’m expecting the latter. And I think that if that happens, I personally will be moving toward advocating some removal of accommodations sooner rather than later.

BETTY LIU: Mr. Kaplan, this is Betty here in New York. So, you mentioned that you believe the consumer is going to pick up, but so far, what we’ve seen is any income that’s been gained by the consumer seems to be headed more into their banks. They’re really pocketing that money and not spending it. How do you get consumers to spend that money?

KAPLAN: Well, so then the question is, why aren’t they spending, and there’s a few possible reasons. One is the financial turmoil of the first few months of this year really had an effect, and it’s understandable, if you turn on the television and you see turmoil, you might not be as likely to buy a car. The other thing is, possibly that political uncertainty is having some effect. And then the other issue, the population in the U.S. is getting older and people might be thinking toward saving for retirement, so the truth is, only time will tell, but they’ve got the capacity to spend, which is the first step in them spending, and it’s just a question of, when will we be likely to see that? We’ll just have to see.

LIU: And we also have to see whether this improving jobs market — we are basically at full employment here in the United States. When is that also going to translate into some substantial wage gains, which we really have not seen?

KAPLAN: Yes, we haven’t seen as much, other than in skilled trades, and I think part of what’s going on, there’s different theories on this — the job market has never been more global. Companies think more globally about where to hire. They have choices to position jobs globally, and I think that puts downward pressure on wages and affects in negotiating power of wage earners unless you’re in a skilled trade — construction, IT, some other skilled trade, and I think that’s maybe part of why you’re not seeing more wage pressure.

LIU: OK, Robert, hang on one second because I want to bring in our economics editor, Mike McKee, who’s also joining in on the conversation. Mike —

MICHAEL MCKEE: I was listening in, Rob, and I had a question for Mark Barton but they said I should go ahead and ask it — Mark’s going to be going to the voting booth on June 23. You’re going to be making a decision on interest rates on June 15. How much is Brexit going to influence what the U.S. Fed does?

KAPLAN: It’ll be a factor, because you laid it out exactly right. Our meeting is the 15th and 8 days later is the vote. We’re going to have to make an assessment — I’m going to have to make an assessment on June 15 what the likelihood is, and right now, it’s a little bit unclear — or it’s unclear. Forget a little bit, it’s unclear. And if it’s still unclear on June 15, that’s going to be a factor.

BARTON: How will you make that assessment? Sorry, Mike, for butting in, because if you look at the polls, Mr. Kaplan, they’re notably unreliable when it comes to U.K. and Brexit, and other elections worldwide. So how will you make that assessment just eight days before —

KAPLAN: We’ll use — and this has been part of this trip, I’ve had lots of conversations with people here on how they’re assessing it, and if the polls are unclear and they show it to be very close, then you’ve got other measures which are a little more lopsided, and the reality is, we’ll have to see what’s available, and if we can’t come to a conclusion, it’s going to be a factor.

MCKEE: Let me follow up by asking you this — from what you’ve heard while you’re over there, should the British vote to leave the European Union? Would that have such an effect on the global economy that it would take the Fed out of the game for quite some time?

KAPLAN: Well, I’m not going to comment on something that I think — my own sense is, it’s still more likely than not that it isn’t going to happen but we’ll have to see. But I’ll wait until it actually happens before I comment, but I’d say this — clearly, there is a whole range of impacts if it did happen, including, not the least of which on the U.K. currency, and ripple effects that might have to other countries, impact on flight to quality and other issues that will create some instability. So, it will be a factor and if it did happen, we’re going to have to take some time to digest it.

LIU: Robert, since we’re talking overseas, I want to ask you about — not necessarily that I want you to comment on what the Bank of Japan didn’t do earlier this week, but what are you learning from what’s going on in Japan and the situation there?

KAPLAN: As you know, in my career, I lived there for almost five years, and Japan has got two big problems — aging population, and in fact, to the point of a shrinking population, and second, high levels of debt to GDP, and both these issues interact with one another and so it makes the debt issue worse. Central Bank easing isn’t going to address any of those issues. It might buy the country time to deal with those issues, but it’s not a substitute for more structural reform, and I know for example, Japan has tried to get women more into the workforce. That’s an example of an appropriate structural reform, but I don’t think central bank actions are going to solve this. They might buy them time, but they’re going to have to deal with these structural issues. And that’s probably true of central bank action more generally. In advanced economies, they can buy time, they can be helpful, but they’re not going to deal with real structural issues.

LIU: Do you think that’s why the Bank of Japan decided not to move?

KAPLAN: It could be, and because there are ripple effects from negative rates on financial institutions, on savers, and the reality is — I think it’s independent of this, but they certainly didn’t expect the yen to strengthen as much as it has, and there’s a cost to having negative rates, so it doesn’t surprise me that they maybe decided to wait a little bit for some of these effects to unfold a little bit more before they decide on their next move.

BARTON: Talking of the BOJ, Mr. Kaplan, brings me to currencies, and many have said that the fact that the BOJ and the ECB have stood pat might give you a window to hike rates without having too much of an impact on the dollar. Can you elaborate on the risks to the dollar from other central banks and how it’s playing into your thinking? The fact that it’s come down from its early year highs.

KAPLAN: And listen, we had two very rough months, as we all know, in January and February. The Fed very clearly slowed down . The dot plot in March had a lower rate of rates. I think my own opinion is, that slowing, combined with some other factors including maybe firming oil prices, I think helped stabilize the markets, had been helpful to China in their stabilization process, and so — and created less divergence, which you started with. So clearly, greater divergence tends to strengthen the dollar and tends to create other ripple effects, so, to the extent there’s a little less divergence, I think it makes it easier for the Fed, I think, makes it a little bit easier for us to manage the situation.

BARTON: And on China, in the meeting, you said, the Fed, that you’re less worried, or the intimation was, you’re less worried about the risks proposed by global economic weakness and financial market turbulence.

KAPLAN: That was the Fed’s statement, so I’ll give you my own two cents on that.

BARTON: And I’ll ask you about that. How relaxed are you about those risks relative to the beginning of the year when we saw a flare up in financial market turbulence?

KAPLAN: So the good news is on China, is I think the last month or two has been a period of a little bit more stabilization. They inserted some reforms, they made it harder for outsiders to arbitrage the currency, it’s not necessarily caused, reduced internal capital flight, and I think you’ve seen some stabilization. But, the only thing to keep in mind, and I always remind myself of and emphasize on China, their big issues are overcapacity, high levels of debt to GDP, aging population, and they’re making this long-term transition from being export driven to being consumer driven. That isn’t going to get resolved in a quarter or a year or even three or four years. This is going to be going on for many years. So my judgment is, I’m glad to see the stabilization, but I’m also mindful that what China’s going through is going to go on for many years and we’re always going to be a little vulnerable to bouts of some financial instability which rippled through the rest of the world, and our only interest, my only interest, we’re the central banker for the United States, but those ripple effects from China can cause financial conditions to tighten here very quickly, and that’s why we watch China so closely, that this is going to go on for an extended period of time.

MCKEE: Robert, it’s Michael. I’m looking at a calendar in politics again — you’ve got a decision, September 21, and a decision on November 2 — if the British election could influence Fed policy, good the U.S. election affect Fed policy?

KAPLAN: So, I’d answer it this way, and I’ve said this before. I think what’s going on in the political arena, as well as any political pressure, should really be something — in my approach — is to screen that out of my thinking. To the extent that political uncertainty, on the other hand, affects economic conditions, so maybe consumers are a little less willing to spend and companies are less willing to spend on capital, that should factor into my thinking. It isn’t going to affect economic conditions, but certainly in terms of the fact that an election is coming up, that, in and of itself for me, isn’t going to influence my position or what I’m advocating unless it has created enough uncertainty to affect underlying economic conditions and then it should affect my judgment.

MCKEE: Do you think it is creating that kind of uncertainty now? You have a lot of candidates running around the country talking about how bad things are.

KAPLAN: You go back to the first quarter then, and it could be residual seasonality in the first quarter, it could be uncertainty because of financial turmoil, the election — the truth is, you never know for sure. We’ll have to see how the second quarter unfolds. So I’m actually watching that carefully to understand how the consumer’s thinking. I talk to, obviously, lots of companies that deal with the consumer to try to get their sense on how consumers are thinking, and this is just something we’re going to be watching very closely in the next number of weeks and months.

LIU: Robert, when Janet Yellen, the Fed chair, was on that stage with her predecessors a few months ago, or I believe it was last month, she said specifically, she did not think that the rate hike in December was a mistake, and that we’re still on a gradual path of rate rises, but, do you think, Robert, that it is a mistake to continue to focus on the dot plot as a determinant, or as a big indicator of where rates go here?

KAPLAN: Let me just say, I agree with what Janet Yellen said. I don’t think December was a mistake and I think we’re on a path, still, to gradual, patient, for lack of a better word, cautious increases. The dot plot has to be put in the right context. It’s redone quarterly, it’s a good snapshot of what each of us around the table think at a point in time — people just have to remember that it’s not a commitment, it’s not a forecast, it’s basically what we think on that date. We’ll redo it again in June. I think that people sometimes maybe make too much of it or over-read what it is, but I also think on the positive side, it’s a good indicator of what we’re thinking at the time that we do it.

BARTON: And Mr. Kaplan, one last question. I’m going to sneak in one on the June meeting. Is a 14 percent probability of a rate hike on our WIRP function looking a little bit too dovish? Market expectations down to 14 percent this week —

ROBERT KAPLAN: So I’ll put it this way — if I see an improvement — we’re not going to get GDP data by the time of the next meeting, but we will have consumer price information and other information. If that is firming over the next couple to three months, I don’t know whether it’s June or not, I don’t like to speculate on individual meetings, but I’ll tell you — if we see better data, I’ll be advocating that we take some movement in the not so distant future, so to answer your question, if that happens, I think these probabilities should come up.

BARTON: Mr. Kaplan, it has been great talking to you. Robert Kaplan there, president of the Federal Reserve Bank of Dallas.

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